In 1993, CBOE created and launched the first FLexible EXchange Options®, (FLEX Options). Designed to broaden institutional investor access to customized derivative products, these contracts are similar in structure to privately negotiated, "over-the-counter" (OTC) options, however, CBOE FLEX Options offer the surety and convenience of exchange-traded options.
FLEX Options provide important features such as:
- Minimization of counterparty credit risk and contract guarantees provided by The Options Clearing Corporation
- Customized contract terms, such as expiration style and date
- Price discovery in a competitive auction market with price transparency
- The administrative convenience of exchange traded options
- Daily closing prices which are set independently by The Options Clearing Corporation
- A secondary market to offset positions
Index FLEX options are available on any of the Indexes listed at CBOE, including:
- S&P 500®
- S&P 100®
- Nasdaq 100®
- Russell 2000®
- Dow Jones Industrial Averagesm
Features of Index FLEX Options
FLEX Options have features that may appeal to institutional investors, hedge funds, and others with particular risk management requirements. For example, FLEX options are particularly useful for designing and implementing large-scale equity portfolio hedges with specific time horizons or performance objectives.
Although FLEX Options are not fungible with standard listed index options, they generally are eligible for margin offset against conventional options on the same underlying index provided certain conditions are met, and are also eligible for portfolio margin accounts in most instances. Please refer to "Customer Margin" below for further information.
FLEX allows users to trade standard listed options before they are available for trading. For instance, if SPX had no October options listed, a user could create a FLEX option with standard listed terms (i.e. 3rd Friday expiration, European style, AM-settlement, standard strike). Once October options become available for trading, your FLEX option will automatically become a standard listed option.
Customization of Contract Terms
FLEX Options are the only listed options that allow users to select option contract terms. Users may specify any of the following terms:
- The underlying Index (e.g. S&P 100, S&P 500, Nasdaq 100, Russell 2000 or Dow Jones Industrial Average Indices).
- Option Type - Call or Put.
- Expiration Date - Up to 15 years from creation. The expiration date specified must be a business day.
- Strike Price - May be specified as an index level, as a percentage, a numerical deviation from a closing index level or an intra-day value level, or any other readily understood method for deriving an index level, rounded to the nearest hundredth of an index point (e.g., 1440.27).
- Exercise Style - American or European, AM or PM, except as follows: If the expiration specified falls on the third Friday of the month (or the first preceding business day if the third Friday is a holiday), only European-style exercise is permitted.
- Settlement Value - Settlement may be based on either the opening settlement value or closing settlement value (see "Creating a FLEX Options" section for details). Exercise (assignment) will result in the delivery (payment) of cash on the business day following expiration.
Competitive Price Discovery
FLEX options have been designed to allow each customer order to be exposed to a competitive auction process for price discovery. The process occurs under the rules of CBOE which means that customer transactions are effected according to the principles of a fair and orderly market following trading procedures and policies developed by CBOE.
The submission of a Request for Quote ("RFQ") through a CBOE member or member firm is the first step in the FLEX process. Upon submission, the RFQ is disseminated to market participants, including on-floor market makers, Remote Market Makers (trading electronically), and member firm traders. This text message contains all of the contract specifications-underlying, size, type of option, expiration date, strike price, exercise style and settlement basis. During a specified amount of time, responses to the RFQ are received and at the end of the period, the initiator can decide to make a trade, or not.
For more information on the mechanics of executing a FLEX trade, go to the "Trading Index FLEX Options" section below.
OCC's Financial Guarantee
As issuer and guarantor of all FLEX Option contracts, The Options Clearing Corporation (OCC) becomes the counterparty to each FLEX trade, providing the financial guarantee that results in the substantial elimination of counterparty credit risk. OCC, founded in 1973, is the world's largest derivatives clearing organization. OCC operates under the jurisdiction of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
The substitution of OCC as the counterparty is achieved through a legally binding novation process that has withstood the test of time. Further, this novation process provides fungibility and helps facilitate secondary market liquidity for FLEX Options.
Administrative Convenience of FLEX Options
FLEX options are cleared in the same manner as standardized listed options. However, as previously stated, OCC determines prices on a daily basis for all outstanding FLEX positions. These prices are available to OCC Clearing Members, and on the OCC website at www.theocc.com.
Creating an Index FLEX Option
Calculation of the Strike Price, Premium and Size for FLEX Options
- The strike price may be set at any index level out to two decimal places, e.g., 767.92,
- The strike price may be expressed in percentage terms of a reference value of the underlying index,
- The strike price may be set against a real-time intra-day reference value (e.g., an at-the-money ("ATM") call),
- The strike price may be set against a futures reference value (e.g., a call struck ATM at futures value less 30 basis points),
- The strike price may be set by any other method, provided that it is clear and easily understandable to all market participants.
- The premium for the RFQ and the executed trade may be expressed in percentage terms of the reference value of the underlying index. Premiums are rounded to the nearest hundredth (greater than or equal to .005 rounds up),
- The premium may be expressed as a specific dollar amount per contract,
- The premium may be contingent on specified factors in other related markets.
- Size for the RFQ and the executed trade may be expressed in millions of dollars of underlying value of the index. CBOE rounds the notional principal amount to the nearest whole number of contracts (greater than or equal to .5 rounds up). This number is determined by dividing the transaction dollar amount by the index value multiplied by $100, the CBOE index multiplier for FLEX Options. The necessary information is then transmitted to OCC for the clearance and settlement process.
- Size may be represented in number of contracts, e.g., 300 contracts.
For strike prices specified in other than index values, premiums specified in other than a dollar amount per contract, and size specified in other than a number of contracts, CBOE calculates actual strike prices, premium prices and number of contracts for submission to the OCC.
There are two methods of determining the settlement value for Index FLEX options-- customers can prescribe either Opening Settlement or Closing Settlement.
Opening settlement value
Opening settlement value is calculated using the opening price in the primary market for each component security on the specified expiration date of the FLEX Option. If a security in the index does not open for trading on expiration day, the last reported sales price for that security will be used in calculating the settlement value. Opening settlement value ticker symbols:
- SET - S&P 500 Index
- OET - S&P 100 Index
- NDS - Nasdaq-100 Index
- RLS - Russell 2000 Index
- DJS - Dow Jones Industrial Average
*Nasdaq-100 Index settlement value calculation is different from other CBOE index opening calculations. It is calculated based on a volume-weighted average of prices reported in the first 5 minutes of trading for each of the component securities.
Closing Settlement Value
Closing settlement value is calculated using the closing price in the primary market of each component security on the specified expiration date of the FLEX Option. If a security in the index does not open for trading, the last reported sales price for that security will be used in calculating the settlement value.
For American-style Index FLEX Options, settlement value determination only applies to the expiration day of the option. Exercises tendered prior to the expiration date are settled against the closing value of the index on the day of the exercise.
Trading Index FLEX Options
Procedures for trading in FLEX Options differ in many respects from those employed for conventional option transactions. Quotes for FLEX options are generally only generated in response to a Request For Quote (RFQ). No FLEX option series, new or established, is continuously quoted, (although orders may be entered into the FLEX electronic book on a daily basis). The Options Clearing Corporation establishes daily prices for series with outstanding open interest, and a Request for Quote can be submitted to determine a current quote.
All options series to be created within the FLEX system must follow the procedures outlined in the steps described below. The ultimate result will be to expose all transactions to the competitive process for price discovery.
For more information on creating a FLEX option or the mechanics of trading FLEX options send an email to Flex@cboe.com, or call the CFLEX Helpdesk at 312-460-1941 during trading hours.
A New Way to Trade FLEX: CFLEX
Trading FLEX Options Electronically
In 2007 CBOE launched CFLEX, the first internet based, electronic system for trading Index and Equity FLEX options available in the U.S. CFLEX 2.0, released in 2012, was built entirely in house and , provides the speed, convenience and anonymity of a fully electronic trading platform and allows for a fully automated FLEX trading procedure. Features of CFLEX include:
- FIX and CMiAPIs on CBOEdirect
- Firm sponsored terminals for end user customers
- Complete anonymity
- Combination of orders and Request for Quotes
- Live Order Books
- Guaranteed participation rights
Step One: Request For Quote (RFQ)
The first step in creating and trading any FLEX option is the Request For Quote (RFQ). The RFQ is a solicitation of user interest to trade a particular option, whether it is a newly created option or an existing FLEX series. The specific details for the contract, including the underlying, type of option (call or put), expiration date, strike price, exercise style and settlement basis must be described in the RFQ. The RFQ may request either a market, a bid, or an offer.
All RFQs must be submitted by a member of CBOE or a non-member that is sponsored by a CBOE member to have direct access to FLEX (referred to as a "Sponsored User").
Click here for more information about CFLEX.
Trading Index FLEX Options in Open Outcry
FLEX trades may also be conducted on the CBOE trading floor through open-outcry trading. FLEX trades executed in open-outcry are reflected on the CFLEX system upon completion.
Step One: RFQ Initiation
The RFQ sequence for open outcry FLEX trades is as follows.
- The Submitting Trading Permit Holder (TPH) contacts the FLEX Help Desk to generate an electronic RFQ to the appropriate crowd PAR Official.
- The trading crowd PAR Official announces the RFQ to the trading crowd.
Step Two: Responsive Quotes
Market Makers, Trading Permit Holders and Floor Brokers acting on behalf of customers will provide Responsive Quotes that are not bound by affirmative quoting obligations.
- Responsive Quotes must be communicated to the Submitting TPH within the Request Response Time, which will be a minimum of five minutes.
- Responsive Quotes are made verbally in the trading crowd at the end of the Request Response Time. No transaction may take place until the Request Response Time has expired.
Step Three: Accepting the Best Bid or Offer
FLEX quotes are generated in response to an RFQ rather than from an order. The Submitting TPH is under no obligation to accept the best bid or offer. If the best bid or offer is not promptly accepted, the quotes are no longer valid.
- The Submitting TPH decides whether to accept the best bid or offer.
- Upon notification of acceptance of a bid or offer by the Submitting TPH, the FLEX Help Desk will disseminate a last sale message as well as enter the transaction into the trade match system and generate a trade confirmation for the parties involved. Generally, only a Submitting TPH may accept quotes made in response to an RFQ. There are two exceptions to this:
1- If the Submitting TPH decides not to accept the BBO made in response to the RFQ, any Market Maker, TPH Organization, or Floor Broker on behalf of a customer, may accept the best bid or offer up to the size currently represented, or;
2- If the Submitting TPH accepts the best bid or offer, but there is excess size available at that best bid or offer, any Market Maker, TPH Organization, or Floor Broker acting on behalf of a customer, may trade the balance available.
The Submitting TPH has priority over any party wishing to trade the requested option series up to the full notional amount specified in the RFQ (subject to the requirements of Section 11(a) of the Exchange Act). If a party other than the Submitting TPH wishes to trade that option series, and none of the above conditions are met, the other party must submit a new RFQ in order to generate Responsive Quotes upon which a transaction may occur.
Quotes are only available upon submission of an RFQ and secondary trading is conducted under the same procedures as series-creating transactions. However, for secondary trading, RFQs can only specify the strike price in the existing numerical format for that FLEX Option series, not a percentage format. Size may be specified in dollars, or number of contracts.
FLEX Options with a settlement value based on the opening prices of the index component stocks in their primary market are not traded on the day the settlement value is determined. For example, if an S&P 500 call, that is European-style and has an opening-settlement basis, expires on a Wednesday, the last trading day for that option would generally be Tuesday. Please refer to "Exercises" for further information.
Information Regarding Open FLEX Series
To see FLEX options that have been created and have open interest, check the OCC website: www.theocc.com.
The trading hours for Index FLEX Options are from 8:30 A.M. to 3:00 P.M. Central Time (Chicago time). However, no RFQ may be presented to the FLEX Official for open outcry trading unless there is sufficient time prior to the close of trading for the entire trade process to be completed.
Position Limits, Exercise Limits and Margin for Index FLEX Options
There are no position limits for FLEX DJX, NDX, OEX, RUT, SPX or XEO option contracts. However, there are reporting requirements for positions that exceed certain thresholds.
The position limits for broad-based Index FLEX Options other than DJX, OEX, NDX, RUT and SPX are 200,000 contracts on the same side of the market on a given index. There are position limits on narrow-based, industry sector and micro-narrow based Index FLEX Options which generally coincide with the position limits for the standard options on those indexes, though some exceptions apply.
Index FLEX Options will not be aggregated with options on any stocks included in the index underlying the FLEX Options, nor will FLEX Options on a given index be combined with FLEX option positions on another index. However, special aggregation requirements apply for Index FLEX Options with expirations that coincide with standard listed Quarterly and Weekly index options.
For more information on position limits and reporting requirements, refer to CBOE Rules 24A.7 and 24B.7.
On expiration day, all Index FLEX Options in the money by .01 of the index are automatically exercised. There are no exceptions to this policy. This policy holds for all opening-settled and closing-settled contracts. All FLEX Option customers should notify their brokers about their desire to exercise. FLEX Options exercise procedures follow CBOE exercise rules for conventional options.
For all American-style Index FLEX Options, regardless of the method of settlement value determination (opening or closing), exercises tendered prior to the expiration date are only against the closing value of the index on the day of the exercise. In addition under CBOE Rules, no exercise notice may be tendered for less than $1,000,000 in underlying value or the remaining underlying value in the position.
Like conventional index options, exercises of FLEX Options result in delivery of cash on the business day following expiration or following the day on which the exercise notice is tendered. The amount per contract is equal to the difference between the settlement value and the exercise price of the option, multiplied by $100.
Limits on Exercise of Index FLEX Options
There are no exercise limits for broad-based FLEX Index Options on DJX, NDX, OEX, RUT, SPX, and XEO. For all other broad-based, industry or micro-narrow FLEX Index Options, the exercise limits are equivalent to the FLEX positions limits prescribed in CBOE Rules 24A.7 and 24B.7.
The minimum value size for FLEX Index Option exercises is $1 million underlying equivalent value or the remaining underlying equivalent value of the position, whichever is less (as described in CBOE Rule 24A.8 and 24B.8).
FLEX Options are not taken into account when calculating exercise limits for non-FLEX Options (e.g. FLEX SPX options positions are not netted with standard non-FLEX SPX positions).
Customer Margin for Index FLEX Options
Index FLEX Options are generally subject to the same customer margin rules that apply to conventional listed index options, and are eligible for portfolio margining accounts.
Margin offsets are allowed for Index FLEX Options on the same index and with the same index multiplier, but with differing exercise styles (American or European), which otherwise meet the standard requirements for offset treatment.
Please be aware that pricing patterns may differ between European and American style options. Under certain circumstances, it is possible that the spread margin held by a carrying broker could become insufficient to cover the assignment obligation on the short option if the customer is unable to exercise the long European-style option and that option is trading at a discount to its intrinsic value. This can also occur between two European-style options with different expirations. Therefore, the carrying broker-dealer will most likely require higher margin for such spreads.
In addition, margin offsets are allowed for Index FLEX Options on the same index and with the same index multiplier but with differing settlement value determinations (open or close) which otherwise meet the standard requirements for offset treatment.
It should also be noted that although CBOE allows margin offsets between Index FLEX Options that use different settlement value determinations, if both options expire on the same day, two days before that expiration day both options must be margined separately because of the possibly significant differences between the final settlement values of the offsetting options. Index FLEX Options can be offset against conventional options on the same underlying index provided it otherwise meets the requirements for offset treatment.
Under no circumstances can Index FLEX Options on one index be offset with options on any other index for customer margin purposes.
The following is a short, non-exhaustive summary of margin treatment for various strategies applying only to broad-based index options:
|Strategy: Long Call, Long Put.
|Cash Account Initial Requirement: Pay in Full.
|Margin Account Initial Requirement: Nine months or less until expiration - pay in Full. More than nine months until expiration - 75% of the cost of the option.
|Margin Account Maintenance Requirement: Nine months or less until expiration - N/A. More than nine months until expiration - 75% of current option market value.
|Strategy: Short Call, Short Put.
|Cash Account Initial Requirement: Cash, Cash equivalents or escrow agreement for short put; escrow agreement for short call.
|Margin Account Initial Requirement:100% of option proceeds plus 15% of underlying index value less out-of-the-money amount, if any, to a minimum of options proceeds plus 10% of underlying index value in the case of calls or 10% of the put exercise price in the case of puts.
|Margin Account Maintenance Requirement: Same as initial, except use current option market value instead of option proceeds.
|Strategy: Put Spread or Call Spread - Long side expires with or after short side.
|Cash Account Initial Requirement: Not Permitted.
|Margin Account Initial Requirement:The amount by which long put (short call) aggregate exercise price is below short put (long call) aggregate exercise price; long side must be paid for in full.
|Margin Account Maintenance Requirement: Must maintain the initial spread requirement.
|Strategy: Short Put and Short Call.
|Cash Account Initial Requirement: Escrow agreement for put and escrow agreement for call.
|Margin Account Initial Requirement: Short put or short call requirement whichever is greater plus the option proceeds of the other side.
|Margin Account Maintenance Requirement: Short put or short call requirement whichever is greater plus the current option market value of the other side.
For Questions on Margin Requirements
For questions concerning customer margin treatment or more details concerning the margin required for various trading strategies, please contact Jim Adams in the CBOE Department of Member Firm Regulation at 312-786-7718 for assistance.
The matters discussed in this section are subject to detailed rules, regulations, and statutory provisions which should be referred to directly for additional detail and are subject to changes that may not be reflected in this material.
How to Access FLEX Trade Information
The following vendors currently display on-line updates of FLEX information. Each terminal currently enabled for options data will display FLEX information. The format currently provided by vendors is in a news headline format.
Bloomberg Financial Markets:
Type FLEX[Go] for page display of all FLEX messages for all exchanges.
Type FLXD[Go] to filter messages displayed by FLEX [Go]
function. User may select type and/or exchange.
For customer support, hit the help (?) button twice on your keypad and send a message.
Available through the Market Pulse/Business Pulse display.
Use [F12] for Market Pulse page. Enter FLEX on command line to view all FLEX messages for all exchanges.
[Enter] must be used for updated information once page
has been accessed.
For customer support, call (800) 654-5657.
- EUR European-style exercise
- HDG FLEX transaction contingent upon a transaction in a non-CBOE listed product
- LST Execution of referenced RFQ
- OEX Disseminated value of the S&P 100 Index
- NDX Nasdaq-100 Index underlying
- PM Closing exercise-settlement value
- QTE Best market quote of referenced RFQ
- RFQ(#) Request for Quote (Number for the day)
- RUT Russell 2000 Index underlying
- SPH March S&P 500 future
- SPM June S&P 500 future
- SPRD Spread, etc. transaction
- SPU September S&P 500 future
- SPX Disseminated value of the S&P 500 Index
- SPZ December S&P 500 future
- STDL Straddle
- STRANGLE Strangle
For More Information
For more information on FLEX® products, click here, call CBOE at 1-877-THE-CBOE, or contact:
For more information on creating a FLEX option or the mechanics of trading FLEX options send an email to Flex@cboe.com, or call the CFLEX Helpdesk at 312-460-1941 during trading hours.
Standard & Poor's®, S&P®, S&P 100® and S&P 500® are registered trademarks of McGraw-Hill, Inc. and are licensed for use by the Chicago Board Options Exchange, Inc. OEX® is a registered trademark, and FLexible EXchange Option®, FLEX®, and SPX are trademarks of the Chicago Board Options Exchange, Inc.
The Nasdaq-100® Index, Nasdaq 1OO®, Nasdaq National Market® and Nasdaq® are registered marks and The Nasdaq Stock Market, NDX and NDS are service marks of The Nasdaq Stock Market, Inc. These marks are licensed for use by the Chicago Board Options Exchange, Inc. in connection with the trading of options based on the Nasdaq-100 Index. Such options have not been passed on by The Nasdaq Stock Market, Inc. or its affiliates as to their legality or suitability, and such options are not issued, endorsed, sold or promoted by The Nasdaq Stock Market, Inc. or its affiliates. THE NASDAQ STOCK MARKET, INC. OR ITS AFFILIATES MAKES NO WAR-RANTIES AND BEARS NO LIABILITY WITH RESPECT TO SUCH OPTIONS.
The Russell 2000® Index is a registered trademark of Frank Russell Company.
The section, "Elimination of Counterparty Risk: OCC's Financial Guarantee" provides an overview of The Options Clearing Corporation. No statement in this chapter is to be construed as a recommendation to purchase or sell a security or provide investment advice. The inclusion of advertisements on CBOE's website should not be construed as an endorsement of any product, service, or website or as an indication of the value of any claims, recommendations, or other information contained therein. The By-laws and Rules of The Options Clearing Corporation govern its policies with respect to certain subjects discussed in this section. Prior to buying or selling FLEX Options a person must receive a copy of "Characteristics and Risks of Standardized Options" and a "FLEX Options" supplement. Copies may be obtained from your broker or from the CBOE, 400 5. LaSalle St., Chicago, IL 60605. A prospectus, which discusses the role of The Options Clearing Corporation, is available upon request from Options Clearing Corporation, One North Wacker Dr., Suite 500, Chicago, IL 60606 (1-800-678-4667).
©2010 Chicago Board Options Exchange, Inc. All rights reserved.
"Dow Jonessm" and "Dow Jones Industrial Averagesm", "Dow Jones Transportation Averagesm", "Dow Jones Utility Averagesm", "Options The Dowsm" and "The Dowsm" are service marks and "Dow Jones Averages" is a trademark of Dow Jones & Company, Inc. and these have been licensed for certain purposes by the Chicago Board Options Exchange (CBOE). CBOE options based on Dow Jones Averages are not sponsored, endorsed, sold or promoted by Dow Jones, and Dow Jones makes no representation regarding the advisability of investing in such products.